How I Rank Solazyme's Partnerships

Thus far, Solazyme has retained the attention and checkbooks of every major partner originally brought onboard. That of course, is aided by consistently hitting internally set goals and having impressive science under the hood. As investors cheer each new development, they should stop and ask themselves which collaborations are the most important to the company's future.

Knowing that not all partnerships are created equally, which friendships should investors be keeping an eye on? Here's my list of the most important deals inked by the developmental stage company to date.

1. Upstream: Bunge and Arch Daniels MidlandSolazyme's S1 filing stated that it takes roughly 20 metric tons of sugarcane crush to produce one metric ton of renewable oil. In other words, inputs to the process are arguably the most important part of the entire platform. That makes the company's feedstock agreements with Bunge in Brazil and Archer Daniels Midland in the United States the most important partnerships.

I have a feeling that once investors get their first glimpse of production costs in 1Q14 they will keep the two partners at the top of the list for the foreseeable future. Why? Regardless of what Solazyme can reap on the open market for its finished products, prices won't mean much if costs are not minimized. Consider that sugarcane prices are expected to hit $35 per metric ton this year and sugar yields are hovering near 13%. Taking that into account, Solazyme's sugar cost would quickly balloon the price for every metric ton of oils if sourced on the open market.

Production costs anywhere near several thousand dollars per metric ton would make the company's renewable oils dead in the water, which highlights the absolute importance of feedstock agreements and joint ventures with Bunge and Archer Daniels Midland.

2. Downstream: Chevron and UOP HoneywellWhat good is feeding sugar feedstocks to your heterotrophic algae if you can't add the finishing touches downstream? Chevron and UOP Honeywell offer Solazyme just that, as well as a potential window to various customers with cash in hand. Both refiners have aided the company for its military contracts, but have yet to formalize any major collaboration with integrated biorefineries currently under construction. It only makes sense for each to expand its relationship with Solazyme and I fully expect them to stick around for the long term.

Why is this so important? Solazyme would have access to world-class refining equipment and expertise. Of course, there is no shortage of refiners scattered throughout the globe, but UOP Honeywell should be of particular interest to investors. The company has a sizable footprint in the renewable fuel industry and is even listed as the 11th "Hottest Company in Bioenergy in 2012-2013" by Biofuels Digest. Solazyme stole the top spot.

3. The militaryA simple truth in business: if you are looking for any two industries willing to pay any price to get something accomplished then you should circle health care and defense. Despite widespread criticism, Uncle Sam's swords and shields haven't been shy about announcing their commitment to biofuels. The allure of producing fuels domestically, on site, and in sizable quantities has attracted some pretty big checks from the Navy and Air Force, which could be the single most important partnership for the biofuels industry.

It should be no surprise then that the military offers a potentially lucrative revenue stream for Solazyme. Although the company expects no further collaborative revenue from Uncle Sam entering 2013, it could be one of the first to offer large quantities of drop-in fuels for such strategic applications. Mainstream biodiesel blendstocks that are fatty acid methyl esters, or FAMEs, have caused problems with military truck and marine engines in the past. While Solazyme offers Soladiesel BD, a FAME fuel, it also offers renewable drop-in fuels such as Soladiesel RD, Soladiesel HRF-76, and Solajet. The latter three are the target of the military.

Solazyme's dealings with the armed forces over the years have received an unfair amount of criticism. It is easy to gasp at the $26 per gallon price tag, but that included the cost of new pilot scale equipment. As the company reaches scale and gradually lowers the cost of production to its goal of $1,000 per metric ton of oil - the same price as bulk jet fuel - the prospects for profitability will improve. Unfortunately, the industry and the military will be open to criticism while both wait for commercial scale to come on line in the next several years.

Investors will also need to watch the competition. Although left for dead by the market after a calamitous 2012, Amyris has reset expectations and will enjoy a full year of production from its first commercial scale facility in 2013. The company's farnesene is capable of serving as a chemical building block for an impressive list of value-added products and low-margin drop-in fuels.

4. MitsuiThe recently announced collaboration with Mitsui got a lot of attention and sent shares soaring, but $20 million spread out over several years amounts to pocket lint for the Japanese conglomerate. Consider that Mitsui raked in $2,650 million in profits in the last nine months and owns $22 billion of the global crude raw materials market for the oleochemical industry.

It would have been nice to see a larger commitment from such a financially strong company. Earmarking $100 million toward the deal wouldn't have broken Mitsui's back, but could have gone a long way to help Solazyme bring its oils to the market.

Still, it doesn't make the news irrelevant. Should the companies expand their relationship down the road, Mitsui could become a crucially strategic partner for Solazyme by giving it direct access to high-value-added product streams, market distribution networks, dozens of customers, and likely lead to massive capacity expansions. Therefore, I would rank it above Roquette Nutritionals and Sephora's distribution partnership on potential alone.

Foolish bottom lineThere are obviously more partnerships for Solazyme not listed here that I will cover in more depth in future articles. Investors know that high-margin oils in health sciences, nutritionals, and home and personal care markets are vitally important as well, but even higher market prices won't make up for their initially limited volumes. Therefore, these are the six most important partnerships for the developmental stage company, each of which can help swipe away risk for investors.

However, being a small company still has its drawbacks. Solazyme has agreed to split revenue at its largest biorefinery in Brazil and still may not own enough chips to play tough with larger partners. That day will come if the company can continue to execute near perfection. Until then investors will need to know how to rank the stable of partners brought onboard, and I hope the list above is a great first step.

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